The European Company Law Action Plan Revisited: Reassessment of the 2003 priorities of the European Commission

I. Reforming Legal Capital: Harmonisation or Fragmentation of Credit or Protection?

– 25 – Reforming Legal Capital: Harmonisation or Fragmentation of Creditor Protection? Jean-Marie Nelissen Grade1 and Matthias Wauters2 Jan Ronse Institute – K.U.Leuven Abstract Legal capital once was the cornerstone of creditor protection in European limited liability companies but has been strongly criticised over the last decade. The European Action Plan 2003 announced a feasibility study to examine possible alternatives. This paper provides an overview of the current debate on legal capital and of the most important alternative regimes that were proposed by company law experts, in particular with respect to distribution restrictions. It emphasises the importance of insolvency law to creditor protection. The authors conclude that the current situation will cause a diversity which is detrimental to a European level playing field. They advocate that the European Union should provide for a harmonisation of distribution restrictions, based on solvency and liquidity tests which may, in the long run, replace the Second Company Law Directive. A minimal harmonisation of insolvency law, in particular by introducing a uniform concept of wrongful trading and fraudulent conveyance, would also largely benefit creditor protection in a crossborder context. Table of Contents 1. Introduction: the European path to reforming legal capital requirements to date 26 2. Overview 31 3. Functions attributed to the legal capital 32 4. Legal capital: a merely transitional phase or a powerful regulatory tool? 33 5. Alternative regimes: a brief overview 36 5.1. Traditional mechanisms enhancing creditor protection 36 5.2. Creditor protection: alternatives to the Second Directive distribution regime 38 1 Professor K.U.Leuven, Attorney Belgian Supreme Court Bar (Linklaters). 2 Research Fellow K.U.Leuven, Attorney Brussels Bar (Eubelius). – 26 – 5.2.1. Second Directive: balance sheet test 39 5.2.2. The High Level Group 39 5.2.3. The Rickford proposal 40 5.2.4. The Lutter proposal 41 5.2.5. The Dutch proposal 41 5.3. Initiatives at the European level 42 5.3.1. Second Directive to remain unchanged 42 5.3.2. Proposal for a Regulation on the Statute for a European Private Company 42 6. Reasons for such a vigorous legal capital debate? 44 7. Should creditor protection be ensured by corporate law? 46 8. Alternative protective techniques 47 9. Creditor protection: does Europe still want a level playing field? 50 10. Concluding remarks: the way forward… 53 1. Introduction: the European path to reforming legal capital requirements to date 1. Capitalrequirementsunderdebate.Thecapitalformationandmaintenance rules are considered to be one of the cornerstones of European company law. The minimum capital requirement for public limited liability companies and the detailed rules on capital formation, shareholder distributions, acquisition of own shares and the alteration of capital, set out in the Second Company Law Directive (hereinafter referred to as the “Second Directive”), express a continental – and in particular, a German3 – approach to shareholder and creditor protection, but are not part of the Anglo-American tradition. It is therefore not surprising that, unlike other Member States, the United Kingdom and Ireland did not extend the scope of the Second Directive to private companies and continued to offer limited liability to corporate forms without minimum capital requirement.4 Given the divergence between the Anglo-American reality and the European legislative framework, the capital requirement has fostered a continuing debate between legal scholars on the pros and cons of such a stringent regime for its aspired beneficiaries, i.e. the shareholders and creditors of a limited liability company.5 3 A direct source of inspiration for the Second Directive was M. Lutter’s doctoral thesis Kapital, Sicherung der Kapitalaufbringung und Kapitalerhaltung in den Aktien- and GmbH-Rechten der EWG, Karlsruhe, Verlag C.F. Müller, 1964. The provision on financial assistance, however, has a UK origin. 4 J. FREEDMAN, “Limited Liability: Large Company Theory and Small Firms”, Modern Law Review 2000, 335. 5 E.g. H. EIDENMÜLLER and W. SCHöN (eds.), The Law and Economics of Creditor Protection. A Transatlantic Perspective, The Hague, Asser, 2008, 489p.; M. LUTTER (ed.), Legal Capital in Europe , ECFR 2006, special volume 1, Berlin, De Gruyter, 2006, 701p.; L. ENRIQUES and J. MACEY, – 27 – 2. Capital regime under pressure. Since the second half of the 1990s, several elements have added particular relevance to this debate. First, in 1996 the European Commission initiated a process to simplify the European legislation on the Single Market (SLIM, “Simpler Legislation for the Internal Market”), in the framework of the general tendency towards...